How Britain can unlock private capital for infrastructure

Tom Bishop

WALK into China’s state planning agency in Beijing and you can pick up a 40-page guide to potential investment opportunities in the UK. That may seem like a small thing in itself, but it's yet another smart move by a commercially-savvy Treasury team bent on banging the drum for inward investment.

Chinese investors have never been slow in chasing the kind of attractive long-term yields these UK assets generate. And doubtless, this initiative will contribute to further success. But more broadly, the guide illustrates the kind of no-nonsense approach that characterises the UK government's outreach to sovereign wealth funds across the world. Attracting that kind of investment is now a priority, according to the latest financial note to the National Infrastructure Plan.

Yet international success raises two important questions about how the UK will fund its infrastructure ambitions. If the opportunities in the UK look so rosy from Beijing, why does there appear to be waning interest among home-grown investors? And if that is indeed the case, what impact will this have on the chancellor's hopes of persuading the private sector to stump up around £250bn of the near £380bn total costs of the nation's infrastructure pipeline?

This is a seemingly Herculean task, but it can be done providing there is sufficient clarity on all aspects of financing. Indeed, the chancellor has pledged to roll out detailed plans in the next Autumn Statement.

Insurance investment in infrastructure has long been billed as a crucial component of the funding chain, and six of the biggest names in the UK, including Aviva, Legal & General and Prudential, have already pledged to invest £25bn. More was expected, but the industry is still adjusting to recent waves of regulatory and legislative change. Many now assert that the conventional insurer balance sheet is no longer flexible enough to help fund infrastructure. Only time will reveal whether this is really the case, but my gut feeling is that the pessimism is overdone.

More broadly, however, the importance of UK insurers in the mix may be questioned. Whatever their appetite for infrastructure investment, these companies would never have sufficient fire-power to satisfy all of Britain’s big project ambitions. They are only ever likely to be part of the equation.

That is why the government's pioneering approach to investment, given this background, makes such good sense. Aware of what needs to be achieved, ministers appear to be as flexible as prudence will allow.

The recently announced £270m guarantee for the Mersey Gateway project is a case in point. A new dual three-lane toll bridge connecting Runcorn and Widnes, in which we are involved, will greatly benefit the local community. And the guarantee was a hugely positive step, helping to underwrite risk through constructive partnership between the private and public sector. Without this guarantee, there would have been no hope that Halton Borough Council, the local authority that straddles the Mersey, could have financed this project. Encouragingly, this approach can easily be replicated elsewhere. And it highlights the importance of empowering local communities to take responsibility for their own infrastructure needs.

This is a theme that the government appears to support. George Osborne has confirmed that the Welsh government will receive new tax and borrowing powers to stimulate infrastructure spending. The result? An immediate start of work to improve the M4 in South Wales.

The regional approach could be worth developing. While the UK has trail-blazed many developments in public-private financing, the US has developed an expertise in regional infrastructure funding models, from municipal bonds to dedicated, project-specific taxes voted through by the local electorate.

Lease-purchase financing also enjoys support in the US: assets are privately owned, but the government works its way towards full ownership at the end of the lease arrangement. Sale and leaseback has also proved popular across the Atlantic, and could be a useful tool in the UK too.

Innovative financing, however, will only go so far. If this government really wants to secure external capital, potential investors need comprehensive information on the contractual and financial aspects of any investment opportunity. There needs to be absolute transparency, particularly on risk-reward formulae.

True, the government appears to be heading in the right direction. But greater clarity would be welcome. If the returns are right, investors will be there – be they sovereign wealth funds, dedicated infrastructure funds or even UK insurers. The commercial debt market has started to open up too, which could make a material difference over the coming years.

Let’s hope that the chancellor secures this critical opportunity, and that the pioneering spirit of projects such as the Mersey Gateway characterises other regionally-based works. But above all, there needs to be a well-structured consultation process between government and industry, culminating in a proper, fit-for-purpose regulatory framework.

Nothing can be taken for granted. With an estimated global infrastructure deficit of around £500bn by 2030, there are plenty of other governments looking to sign up investors if the UK falls short.

I have no doubt that the chancellor will be listening to industry and investors. Working together, ambitious plans will be converted into boots-on-the-ground projects. There is still much to do.

Tom Bishop is executive chairman for Europe, Middle East and India at URS.